UBS hit with New York auction-rate security suit

N.Y. State AG Andrew Cuomo files civil suit against Swiss banking giant for falsely marketing and selling investment to retail investors.

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By David Ellis, staff writer

UBS' auction-rate security woes mounted Thursday after New York State Attorney General Andrew Cuomo filed a multi-billion dollar lawsuit against the Swiss banking giant.

NEW YORK ( -- New York State Attorney General Andrew Cuomo Thursday brought a multi-billion dollar civil lawsuit against the Swiss banking giant UBS for allegedly pushing everyday investors into buying troubled auction-rate securities.

The lawsuit charges UBS (UBS) with falsely marketing and selling auction-rate securities as safe, cash-equivalent investments at a time when the market for these securities was under severe strain.

"Today we bring the first nationwide lawsuit against UBS, seeking to recover billions of dollars for customers and sending a resounding message to the rest of the industry that this type of deceptive behavior will not be tolerated," Cuomo said.

The state's investigation also revealed that top UBS executives sold off approximately $21 million of their personal holdings of auction-rate securities, after they learned of troubles in this segment of the market.

"You can't have two sets of rules - one set of rules for customers and one for senior officials," said Cuomo.

New York's top law enforcement official noted, however, that no charges had been filed against any individuals.

He added that his office was looking at a number of other financial institutions, but declined to provide any further details citing the ongoing nature of the investigation.

UBS issued a statement Thursday, saying it would vigorously defend itself against the complaint.

The company said that it believed that no employee had engaged in illegal conduct and rejected the claim that the firm was involved in a widespread effort to move its inventory of auction-rate securities from its own books.

"It is frustrating that the New York Attorney General has filed this complaint while we have been fully engaged in good faith negotiations with his office to bring liquidity to our clients holding auction-rate securities," said Karina Byrne, a spokesperson for UBS.

Auction-rate securities are long-term bonds that hospitals, cities and corporations sell at weekly or monthly auctions, which many investors, until now, had treated like cash investments. The market for these investments is worth about $330 billion.

The auction-rate security market began to fail in February as the credit crisis took a turn for the worse, effectively locking up the market for these securities.

Instead of purchasing them, banks allegedly sold those investments to average individual investors so as not to have to take them onto their books. Financial institutions like UBS have denied such claims, saying that their brokers fully disclosed the risks associated with these investments.

As of February, UBS had more than 50,000 customer accounts holding about $25 billion in auction rate securities

Cuomo said the lawsuit seeks to get UBS to buy back the securities at their face value.

"They [customers] want their money back," he said. "My job is to get their money back."

Cuomo's involvement may not bode particularly well for UBS, said James D. Cox, a professor in corporate and securities law at Duke University. But he noted that the suit could also eliminate some of UBS' other legal auction-rate security headaches.

"UBS could use this as a basis for getting a global settlement and barring all other related suits," said Cox.

In June, Massachusetts state securities regulators filed a civil suit against the firm. And that's not to mention the numerous individual and class-action suits that have been filed against UBS.

Thursday's announcement also marks the latest development in the ever-widening auction rate security scandal. A number of Missouri state securities regulators inspected the offices of Wachovia Securities in St. Louis last week, seeking documents related to the sales of auction-rate securities. Wachovia Securities is a subsidiary of Wachovia (WB, Fortune 500), the nation's fourth-largest bank.

Shares of UBS fell more than 7% on the New York Stock Exchange Thursday. To top of page

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